Second wave of inflation could last into 2022 due to energy crisis
The construction industry could continue to face high levels of price inflation well into 2022. Arcadis has suggested that the continued fuel crisis is likely to result in the rise of construction costs in the new year, with this news coming just as suppliers report that the timber crisis is starting to ease.
Arcadis has updated its tender price forecast as it expects inflationary pressures on buildings to peak from 4% to 5% regionally and between 4% and 6% in London. It is also expecting 2022 to see increases of between 5% and 6% in infrastructure.
The latest quarterly market report from the consultancy firm says that the inflationary pressures that started this year show no signs of improving. Prices started to increase around June 2021, with a rapid rise in costs during the second half of the year. This is expected to continue into 2022, putting extra pressure on the industry.
This second wave of inflation is being driven by the energy crisis, with increasing energy costs making some materials more expensive. Manufacturing of products like cement, bricks, concrete and glass all require a large amount of energy, meaning that manufacturing costs will increase as the energy crisis continues.
It is expected that the hike in fuel costs and the high energy intensity of these manufacturing processes will result in a wider impact on prices than the shortages of raw materials had this year. According to Arcadis, it is currently unclear exactly how this will affect construction, but it is expected that private residential and industrial warehousing will continue to grow. However, markets that are more price-sensitive, such as affordable housing, could slow down in the new year.
Agnieszka Krzyzaniak, market intelligence lead at Arcadis, said: ‘Continuing high output proves that the strength of the construction industry shows no signs of abating, and the recovery continues. Strong new orders data indicates that the demand is still there and, as such, prices are not likely to decrease anytime soon.
Although we can expect the upward pressure on costs to start easing in 2022, elevated inflation rates will still remain a defining feature of the market. The difference is that it will be mainly driven by rising energy costs and, with the energy used in manufacturing materials translating into around a quarter of total construction costs, the sector is particularly vulnerable to any prolonged price increases.’
As well as materials, it is expected that the energy price fluctuations will start to affect on-site operations. Running on-site machinery is set to become more expensive while the removal of the red diesel rebate in April next year will also see prices increase.
Ms Krzyzaniak suggests that construction firms start to make changes now to reduce energy costs in the short term. For example, cutting the idle and stand-by time of equipment could help to save on fuel whilst also cutting carbon emissions. When it comes to long-term solutions, she suggests switching to electronic equipment and planning for hydrogen adoption which will help with energy cost savings.
Despite this rise in inflation, the overall outlook for the UK construction sector continues to be strong, with business confidence remaining positive. The first three quarters of this year have seen new orders come in well above levels seen before COVID-19, showing a great recovery following a challenging 2020.
The bellwether IHS Markit/CIPS UK Construction PMI Total Activity Index hit 55.5 in November, rising from 54.6 in October, with construction buyers reporting their fastest rise in output in months. Commercial construction has been leading the way (indexed at 56.5), which has helped to offset the slight decline in house building (54.7 in November, down from 55.4 in October).